California regulators will hold public hearings Tuesday and Wednesday in the mountains and high desert region about 100 miles northeast of Los Angeles as part of an investigation into the skyrocketing natural gas prices last winter charged by Las Vegas, NV-based Southwest Gas Corp.

The consumer advocate branch of the California Public Utilities Commission, the Office of Ratepayer Advocates (ORA), is recommending a $7.2 million disallowance for Southwest for allegedly mismanaging its gas supply portfolio. The utility, through a spokesperson, argues it did what was prudent. The issue goes back to the summer of 2000.

With wholesale gas prices taking off in the summer of 2000, Southwest Gas delayed putting more supplies in storage because of the prospect of lower wholesale gas prices later in the year. The price spike, however, got worse by last winter, and Southwest decided to hedge by buying gas at fixed rates under longer-term (a year or longer) supply contracts with a “variety of suppliers.”

As a result, now that wholesale energy prices have decreased considerably, Southwest customers in the high desert and mountains surrounding LA are paying $1.10/therm currently, compared to $1.57/therm last winter, but not the 60-70 cents/therm paid by Southern California Gas Co. customers, a Southwest spokesperson said.

Before holding evidentiary hearings in San Francisco later this month, the CPUC will allow customers to vent at separate public hearings Tuesday and Wednesday, asking them to specifically address three issues of concern to the regulators:

“There was such a concern raised last winter about high gas costs that we entered into some fixed-price contracts last spring and winter in order to mitigate against that happening again,” the Southwest spokesperson said. The length and terms of the contracts varies, with prices ranging from $3 to $6 or $7/decatherm. Each contract starts and end at different times.

The CPUC is asking why the utility didn’t use storage as a hedge, and the spokesperson said normally the company would have, but prices were too high that summer.

“We didn’t store because the prices were so high, and the future market at that time indicated that prices were going to do down,” the spokesperson said. “In reality, it didn’t, so the ORA has criticized the company and recommended a disallowance.

“If we had gone back to our traditional way of doing things, customers would have been paying considerably less this winter. But in order to protect customers and mitigate against volatility, we entered into the fixed-price contracts. It is always easy to second-guess and say we should have done something else.”

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